Higher Ed Risks Under New Legislation

At HigherEdRisk, we have been tracking executive orders, college closures, the demographic cliff, enrollment risk, endowment taxes, and accreditation risk, among other key risk concerns. This article will focus on the key risks and potential mitigation strategies associated with the "One Big Beautiful Bill Act." It is also important to note that while some key components of the law will take effect later this year, other elements will not be implemented until after the midterm elections so there is a lot in flux.

Impact on Graduate Students

To begin with, the legislation targets aid for graduate and professional students.  Per an article from The Hill -"Grad PLUS loans will be replaced with new borrowing caps of $100,000 for many grad students and $200,000 for professional students, such as those enrolled in medical schools or law schools. All of the loan changes are set to take effect in July of 2026."

Eliminating Grad PLUS loans could lead to fewer graduate students which will only further exacerbate universities that are struggling financially especially institutions that rely heavily on graduate programs for tuition revenue.

Mitigation Strategies:

Students may shift toward private loans but those loans will lack federal protections and flexible repayment options. Time will tell if this change will impact overall affordability and the rate that students continue to pursue post-graduate education.

To prepare for this change, institutions will need to continue diversifying their revenue streams. Alumni engagement may be crucial in helping to offset these financial losses. Corporate partnerships may also be a good way to bolster funding.

The Risk Sharing Model

Out of all the provisions, this one is the most interesting to me, and I love that RISK is specifically called out. The risk-sharing model is intended to increase college accountability for student costs and outcomes. This is not a bad thing, as we have seen significant blowback in this space, not just from grandstanding politicians, but also from the students themselves. Institutions must prioritize helping students complete their degrees more efficiently.

The new law will implement a risk-sharing system requiring colleges to cover a portion of the costs when students don't earn enough to pay down the loan principal. Institutions should not only re-evaluate educational programs but also build reserves and adjust budgets to account for these potential liabilities.

An article from the American Enterprise Institute (AEI) shares some fascinating statistics on how the Big Beautiful Bill will hold institutions accountable for outcomes. What I found interesting was that "The University of Southern California—among the institutions that fare the worst—the expected risk-sharing penalty of $288 million will amount to just 0.6 percent of the school's anticipated core educational expenditures over the next decade." The author further opined that "while the risk-sharing penalties will be large enough for schools to notice, they will not pose a threat to the financial stability of most institutions." This is another risk that will need to be accounted for when preparing budgets, but time will tell how detrimental this component will be to an institution's bottom line.

Furthermore, revenue generated from the risk-sharing penalties could fund a new grant program for high-performing, low-tuition colleges that serve low-income students. This risk may become an opportunity and help some institutions.

Accreditation Risk

Why is this important? The U.S. The Department of Education must recognize accrediting agencies before colleges it oversees can access federal financial aid.

Trump has considered accreditors as "the gatekeepers that decide which colleges and universities American students can spend the more than $100 billion in Federal student loans and Pell Grants dispersed each year." Trump has also expressed his desire for accreditors to be held accountable for  "unlawful discrimination." This aligns with his earlier Executive Order that mandated that accreditors require institutions to use program data on student outcomes "without reference to race, ethnicity, or sex."

What needs to be done? Institutions may need to adjust their operations, academic programs, and policies to maintain access to federal aid and accreditation under the new standards. To mitigate this risk, institutions will once again have to allocate funds and resources to comply.

It is also unclear what will happen to existing accreditation bodies. We are already seeing newly proposed accreditors.  According to a HigherEdDive article, a "new agency — called the Commission for Public Higher Education — is being created by the State University System of Florida, the Texas A&M University System, the University System of Georgia, the University of North Carolina System, the University of South Carolina system and the University of Tennessee System.

The change in accreditors and the accreditation process will only exacerbate uncertainty, and with uncertainty comes more risk. To successfully navigate this unpredictability, institutions will need to balance academic freedom with compliance requirements. This will only become more complicated as we enter the mid-term election season.

Looking into the Future - Endowment Taxes, Loan Forgiveness, and Tax Liability Risks

Endowment tax has been discussed for some time, and I wrote an article on this financial risk earlier this year. It is no secret that many higher education leaders believe that this new tax rate will lead to more shortfalls and economic constraints. This means that some institutions will have to raise tuition, reduce financial aid, or both, which will negatively impact both the institution and its students.

So, does this mean that the elite, well-funded institutions will fare the worst?  Not so, according to a recent analysis from Forbes. According to Forbes, "While 11 schools, including Princeton, MIT, Yale and Harvard, were hit with a higher tax on their endowments' investment earnings, Congress exempted wealthy small schools, including Swarthmore, Amherst, Hillsdale and CalTech, from the levy."

Additional Tax Liability Risks

The temporary tax exemption for forgiven student loan debt under the American Rescue Plan Act (ARPA) is set to expire on December 31, 2025. This means that unless Congress intervenes, student loan debt forgiven after December 31, 2025, will once again be considered taxable at the federal level.

Kiplinger does a good job of sharing risk mitigation strategies to deal with this potential change.

Per the article, student borrowers should:

• Review their repayment plan: If you're in an income-driven plan, check how and when you'll need to transition to a new plan under the OBBB.

• Understand their state tax liability: Check whether your state will tax forgiven student debt, and plan accordingly.

• Monitor communications: Read updates from your loan servicer, the Department of Education, and advocacy groups.

• Seek guidance: Consult with a tax advisor or financial planner to prepare for possible tax liabilities or garnishment if you're at risk of default.

Bottom Line:

These are surely interesting times. While the future of higher education appears uncertain and chaotic, the effects of the Big Beautiful Bill will take time to unfold. And, with the upcoming midterm elections, who knows? In the meantime, it's the ideal time to assess all these risks and start implementing your risk mitigation strategies now to remain vigilant in times of change. And of course, if you enjoy our risk intelligence and analysis - follow us and subscribe to HigherEdRisk!